Contra Account Definition, Types, and Example
Therefore, contra accounts are the reverse accounts that decrease a specific account’s balance. Learn why contra accounts, when utilized correctly along with a paired account, are a crucial component of accurate accounting and financial review. Contra asset accounts can be used in a variety of areas, but there are three contra asset examples that you should pay close attention to. At the end of year 20, the car and the accumulated depreciation accounts will be written off from the balance sheet, as the car will be a fully depreciated asset. Although they all aim at reducing the balance of some type of account, it is useful to have some general foundational knowledge of the different types of accounts.
- Instead of debiting the asset account directly, the contra asset account balance will be credited (reduced) separately.
- You’ll continue to use the contra asset account until the equipment has been completely depreciated, retired, or sold.
- Whereas assets normally have positive debit balances, contra assets, though still reported along with other assets, have an opposite type of natural balance.
- For example, an increase in the form of a credit to allowance for doubtful accounts is also recorded as a debit to increase bad debt expense.
- To offset this, the allowance for doubtful accounts balance is adjusted via a credit, while the bad debt account is debited to balance out the AR account.
- A debit will be made to the bad debt expense for $4,000 to balance the journal entry.
- In this article, we’re going on a deep dive into what exactly a contra account is, how contra accounts work, why and how you would use contra accounts and more.
Accumulated depreciation
You may want to first classify contra accounts as contra asset accounts, contra liability accounts, contra equity accounts, or contra revenue accounts before accounting for any transaction. There are four key types of contra accounts—contra asset, contra liability, contra equity, and contra revenue. Contra assets decrease the balance of a fixed or capital asset, carrying a credit balance.
Popular Types of Contra Accounts
Learn financial statement modeling, DCF, M&A, LBO, Comps and Excel shortcuts. Treasury stock differs from other stocks in that it has no voting rights, and no dividends are paid to the treasury stock. The main reason is to make the remaining shares more valuable, as their prices are expected to rise after the stock buyback. Contra Accounts serve as a reduction to the balance of their corresponding accounts to find their net values.
Examples of Contra Accounts
By recording the offset in a separate contra account, accountants can see how much of the value in the main account has been offset. A contra account is a general ledger account with a balance that is opposite of the normal balance for that account classification. The use of a contra account allows a company to report the original amount and also report a reduction so that the net amount will also be reported. The net amount is often referred to as the carrying amount or perhaps the net realizable amount. In its general ledger, the business will want to capture its gross sales figures and the actual value of the discount. There is almost always a story behind data; a clarification or historical insight that changes the meaning behind raw figures.
- Contra accounts are used to reduce the original account directly, keeping financial accounting records clean.
- The net amount is often referred to as the carrying amount or perhaps the net realizable amount.
- For example, if a piece of heavy machinery is purchased for $10,000, that $10,000 figure is maintained on the general ledger even as the asset’s depreciation is recorded separately.
- Including contra revenue accounts is important in the income statement because it shows the original amount of sales the firm has made, along with any factor that has reduced that amount.
- Excess, stored inventory will near the end of its lifespan at some point and, in turn, result in expired or unsellable goods.
- When accounting for assets, the difference between the asset’s account balance and the contra account balance is referred to as the book value.
Is a Contra Account a Debit or Credit?
Accumulated depreciation is a contra asset account used to record the amount of depreciation to date on a fixed asset. Examples of fixed assets include buildings, machinery, office equipment, furniture, vehicles, etc. The accumulated depreciation account appears on the balance sheet and reduces the gross amount of fixed assets. Contra liability accounts are less commonly used than contra asset accounts. Contra liability accounts are mainly used by corporations that issue bonds frequently.
Contra equity account
Examples of equity contra accounts are Owner Draws and Repurchased Treasury Stock Shares. A liability that is recorded as a debit contra account balance is used to decrease the balance of a liability. Contra Liability a/c is not used as frequently as contra asset accounts.
- If you offer credit terms to your customers, you probably know that not all of them will pay.
- For example, we need separate accounts to hold the actual cost of property, plant and equipment (PPE) and related accumulated depreciation.
- These three types of contra accounts are used to reduce liabilities, equity, and revenue which all have natural credit balances.
- There is the existence of contra accounts in accounting which are accounts that have the purpose of decreasing the value of another specific account if the two accounts are netted or summed together.
- The allowance for doubtful accounts appears on the balance sheet and reduces the amount of receivables.
- The percentage of sales method assumes that the company cannot collect payment for a fixed percentage of goods or services that it has sold.
Benefits of Contra Accounts
- A business might elect to separately state contra asset accounts on its balance sheet, so that the users of its financial statements can obtain additional information about the contents of these accounts.
- It also shows the carrying (net) amount of $19,000, which you report to your firm’s balance sheet.
- For example, an asset was purchased by a company for $100,000 – that is, the historical cost of the asset was $100,000 – and its contra asset counterpart has a balance of $30,000.
- These are all examples of contra-asset accounts, which are the prevalent type of contra accounts.
- Therefore, these companies must maintain an obsolete inventory reserve account to net off any unusable stock from the account.